SK Telecom Co., Ltd. — FY2020 Form 20-F
Business context and period. This is an audited annual report for the fiscal year ended December 31, 2020, filed April 29, 2021; it is not a standalone Q4 report. Consolidated financial statements are prepared under IFRS as issued by the IASB and reported in Korean won. SK Telecom operates wireless, fixed-line and media, security, commerce and other businesses in Korea. Wireless remains the largest segment.
Key financial metrics
Amounts below are in billions of won unless stated otherwise.
| Metric | FY2020 | FY2019 | Change / context |
|---|---|---|---|
| Revenue | 18,624.7 | 17,740.7 | Up 5.0% |
| Operating profit (IFRS) | 1,104.6 | 1,007.3 | Up 9.7%; operating margin 5.9%, versus 5.6% |
| Profit before tax | 1,877.0 | 1,161.0 | Up 61.7% |
| Profit for the year | 1,500.5 | 860.7 | Up 74.3%; net margin 8.0%, versus 4.8% |
| Operating cash flow | 5,821.9 | 4,035.0 | Up 44.3% |
| Capital expenditures | 3,557.8 | 3,375.9 | Up 5.4%; primarily network and 5G investment |
| Cash, short-term financial instruments and short-term investment securities | 2,947.0 | 2,268.1 | At year-end |
| Working capital | 597.1 | 236.8 | Surplus at both year-ends |
| Total assets / total liabilities / equity | 47,907.0 / 23,510.7 / 24,396.2 | 45,202.4 / 22,385.4 / 22,816.9 | Company-reported liabilities-to-equity ratio was 96.37%, versus 98.11% |
| Borrowings and debentures, including current portion | 10,718.7 | Not stated here on a directly comparable basis | Includes 9,669.5 of non-current long-term debt and 1,049.2 of short-term borrowings/current long-term debt |
Net cash used in investing activities was 4,250.4 and net cash used in financing activities was 1,457.6. The filing reports no off-balance-sheet arrangements.
Material changes and drivers
- Growth beyond mobile. Cellular services revenue rose 1.0% to 12,295.7, with wireless service revenue up 2.8%, principally as more subscribers adopted higher-priced 5G plans. Fixed-line services revenue rose 15.8% to 3,405.7, including the acquired Tbroad operations and IPTV growth. Security revenue increased 12.3% to 1,246.5; commerce revenue rose 11.6% to 792.9.
- Segment profitability was mixed. Cellular segment operating profit increased to 1,007.8; fixed-line segment profit rose to 244.1, primarily reflecting Tbroad. Security segment profit declined 15.9% to 112.4, while commerce segment profit was 10.9. These segment figures use K-IFRS reporting and do not equal IFRS consolidated operating profit.
- Costs and impairments. Operating expenses increased 4.7% to 17,619.7, reflecting higher commissions, labor, depreciation and other costs; cost of goods sold declined. The company recognized 198.4 of impairment on frequency usage rights, including 186.0 related to the 28 GHz spectrum, and 208.8 of total impairment losses on property and equipment and intangible assets.
- Investment income materially lifted earnings. Equity-method gains from associates and joint ventures rose to 1,028.4 from 449.5, including 995.1 of share of SK Hynix profit versus 416.2 in 2019. SK Telecom held a 20.1% stake in SK Hynix. This equity-method income is distinct from cash dividends received.
- Cash flow and financing. Operating cash flow improved, while investing outflows grew to 4,250.4, largely reflecting capital spending. Financing outflows increased to 1,457.6, including 742.1 in dividends, 426.7 in treasury-share purchases and debt repayments. The company had 480.0 of available local-bank credit lines at year-end.
Outlook, commentary, risks and unusual items
- Management expected 2021 capital expenditures to be similar to 2020, directed to 5G expansion, LTE and Wi-Fi networks, IoT, AI, data infrastructure and growth businesses. Plans remain subject to market and technology developments and could change.
- The MSIT planned to reallocate 95 MHz of spectrum to SK Telecom. The final payment depends in part on 5G cell-site construction; the expected aggregate consideration for all three operators was 3.2–3.8 trillion, not SK Telecom’s individual amount.
- COVID-19 reduced roaming revenue and demand for new wireless devices. Management said the impact had not been materially adverse to date, but warned that a prolonged pandemic could affect demand, collections, network operations and equipment supply.
- Key risks include intense competition and pricing pressure, regulation of rates and wholesale network access, 5G investment returns and spectrum costs, cybersecurity and service disruptions, reliance on key network suppliers, foreign-exchange exposure, and the value and performance of the SK Hynix investment. The company also disclosed debt covenants, including a maximum net debt-to-EBITDA ratio of 3.50 and minimum EBITDA-to-interest coverage of 4.00, calculated on a separate-company basis.
- Management was considering a potential spin-off into a telecommunications company and a holding company for semiconductor and new ICT businesses, with further decisions expected in the first half of 2021. T Map Mobility had already been spun off as a wholly owned subsidiary in December 2020; subsequent Uber and investor transactions described in the filing were post-year-end developments.
- The filing disclosed a possible U.S. PFIC classification for 2020 and a significant risk of PFIC status in current and future years, potentially affecting U.S. investors’ tax treatment. It also reported a 6.4 billion FTC fine and corrective order in February 2021 concerning bundled IPTV sales commissions; the company expected to pay the fine and planned to challenge the order and fine. Earlier KCC fines disclosed in the filing had been paid.
Important facts for investors to verify
- Assess how much of FY2020 profit growth came from recurring operations versus the increased SK Hynix equity-method contribution and other valuation gains.
- Confirm the expected cost and timing of spectrum reallocation and the funding required for planned 5G and other capital expenditures.
- Review debt maturities, lease and spectrum obligations, covenant headroom, and the composition and availability of reported liquid resources.
- Compare segment trends on a consistent basis, accounting for Tbroad’s April 2020 merger and changes in segment classification.
- Monitor the proposed corporate restructuring, post-year-end transactions and regulatory proceedings, and confirm PFIC status with appropriate tax advice.
The independent auditor issued an unqualified opinion on the consolidated financial statements and on internal control over financial reporting as of December 31, 2020.